Is Chidambaram's plan to create big banks feasible?

The general wisdom, in spite of the crash of Lehman Brothers and others in the West, is that large banks are too big to fail.

This is not for the first time the government has pushed for bank consolidation.

The talks first started in the early '90s when Narasimham Committee-I said in its report on improving efficiency and productivity of financial institutions that three to four big banks, led by SBI, should be developed as international banks, followed by national banks with a countrywide presence and then local and rural banks.

Narasimhan Committee-II, in its 1998 report, also stressed consolidation.

Is Chidambaram's plan to create big banks feasible?

In December 2009, the finance ministry had called chiefs of five leading public sector banks -- Punjab National Bank, Canara Bank, Union Bank of India, Bank of Baroda and Bank of India -- to take their views on consolidation.

But the banks could not come up with a concrete plan and owing to stiff resistance from small banks, the idea was dropped.

In fact, then-finance minister Pranab Mukherjee said the government would not force any merger and the proposal would have to come from the banks themselves.

Now that the consolidation buzz has restarted and has the blessings of Chidambaram, the finance ministry has begun to move fast.

It is learnt to have called the chiefs of a few large banks to discuss the issue.

Though the government has not formally given any road map to the banks for a merger, it has created an enabling environment for the marriage of some small banks with large ones.

Is Chidambaram's plan to create big banks feasible?

Unions no more exercise the kind of influence they used to in the past. In fact, merger of two of SBI's associates -- State Bank of Saurashtra and State Bank of Indore -- into the parent was more or less seamless.

The remaining five subsidiaries -- State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner & Jaipur, State Bank of Patiala and State Bank of Travancore -- would also be merged into SBI gradually.

So far, as technology is concerned, the Department of Financial Services has taken care of the issue.

It has divided banks into seven groups based on the core banking solution (CBS) platform (see table).

Is Chidambaram's plan to create big banks feasible?

A third deterrent could be the Competition Commission of India (CCI), which has been given the powers to look at all banking mergers and acquisitions.

Perhaps this could be the reason why Chidambaram wanted to keep banking mergers and acquisitions out of the purview of the competition watchdog, but had to relent before the Opposition.

Changing landscape

"Bringing mergers and acquisitions under CCI could be counter-productive, if such consolidation is seen as creating a monopoly," points out Jyoti Prakash Gadia, managing director of Resurgent India, an investment bank.

Experts believe mergers are needed not just for achieving economies of scale but also for survival of small banks, which would find it increasingly difficult to survive with the entry of new private banks once RBI issues more licences and intensifies competition in the sector.

Is Chidambaram's plan to create big banks feasible?

Ramnath Pradeep, former chairman of Corporation Bank, says small banks are losing business because not many people are interested in dealing with them and increasingly want to go with large banks which can provide wider reach, better connectivity and convenient banking.

But to make Indian banks really global, mergers of large banks like State Bank of India and Bank of India are required, he says.

According to the seven groups made by the finance ministry, besides SBI subsidiaries, other small state-run banks that could be subsumed into bigger banks include Punjab & Sind Bank, Dena Bank, United Bank of India, Bank of Maharashtra, Andhra Bank, Vijaya Bank, Corporation Bank, Indian Bank, Allahabad Bank, UCO Bank, Oriental Bank of Commerce, Syndicate Bank, IDBI Bank and Indian Overseas Bank.

Is Chidambaram's plan to create big banks feasible?

Among private banks, old-generation lenders such as Federal Bank, South Indian Bank, Lakshmi Vilas Bank, Karnataka Bank, Dhanlaxmi Bank and Karur Vysya Bank could be potential targets for large government banks as well as new private banks.

"Old private sector banks don't have deep pockets. But the larger reason why they could be acquired is that after the enactment of the new banking law their valuations would go up.

"This would be the right time for them to sell," says Ashvin Parekh, partner, Ernst & Young.Notwithstanding all these issues, bankers agree consolidation is inevitable.

At the moment, the finance ministry may not force banks to consolidate, as politically, it may backfire, but sooner or later market forces will compel small banks to come together with large banks.

This is what happened in the '90s and this is how many of the global amalgamations have happened.